Narrative Watch | Spring 2019 Edition

Nathaniel Whittemore
Apr 26 · 8 min read

This article first appeared in Delphi Digital’s Macro Outlook 2019. Sign up for Delphi Insights to get access to the full report (plus a boatload of additional subscribers only research).

Like any nascent industry, one of the key features of crypto is the never-ending battle for the narrative. Narratives are both how we make sense of new phenomenon as well as attempts at self-fulfilling prophecy, designed to incept the community into seeing the world in such a way that is beneficial to one’s position. In other words, market narratives are marketing.

Understanding this does not diminish the importance of narratives, but it does help us contextualize them and in so doing, reduces their ability to make us over react as one narrative subsumes another.

The narratives below represent a snapshot of the emergent conversations. Each is still developing but has something interesting to tell us about the state of crypto today.

1. The Return of Token Sales

As the narrative of token sales goes, so goes crypto. 2017 was the Cambrian explosion. 2018 was the stragglers to 2017 racing to suck all the marrow from the bone of the ICO before its star faded. Since the back half of last year, token sales have been fundamentally off narrative, with even many of the hedge funds that emerged shifting their strategy to focus on equity investments. Although security token offerings (STOs) were heralded by some as the next coming, they’ve yet to really make a dent in the market consciousness other than providing something for former “ICO Advisors” to switch their LinkedIn bios to.

It is interesting then to see a growing frenzy around Initial Exchange Offerings or IEOs. First modeled by Binance with their “LaunchPad” platform, an IEO is more or less just an ICO that goes straight to the exchange hosting it. On the one hand, by incorporating the exchange listing, it offers immediate liquidity. On the other hand, it is even more fundamentally centralized and designed with the incentives of the exchange in mind.

Yet for many in the action-hungry crypto market, the results were hard to ignore. Binance’s offering of the Tron-backed BitTorrent Token sold out in two sessions of under 15 minutes each. Their second project sold out in ten seconds. Subsequently, at Token49 in Hong Kong, The Block’s head analyst Larry Cermack noted that IEOs dominated the conversation, with every other exchange racing to catch up. Now, somehow, we find ourselves back in a world where people are competing for the vanity metric of how fast their IEO sold out.

What to watch for:

It is clear that there remains demand — especially globally — for these short term token pops. What’s less clear is how sustained that will be as every exchange launches their own version of LaunchPad. If — as seems likely to me — the success of these sales starts to deteriorate rapidly as more exchanges jump in, this trend and narrative could burn itself out almost before it begins. If, on the other hand, they’re able to continue to be successful, it could be ICO-all-over-again.

2. Ethereum Competition

As the first viable smart contract platform, Ethereum had a significant window in which it was the only game in town. This allowed it to build significant moats, particularly around its developer network.

This has changed, as a wave of base layer competitors all purporting improvements on some vector — be it throughput or scalability or governance — come online, often with big war chests to start trying to incentivize developers to move.

The challenge of this new competitive presence is compounded by two factors. The first is frustration with the project around the speed of shipping upgrades and improvements, exemplified this past quarter by the delay in the Constantinople hard fork, and even more importantly in the current roadmap that doesn’t have Eth 2.0 coming online until 2021.

The second is, for many, that the competitive challenges aren’t just from outside but from within. There is a growing conversation about whether interoperability chains like Polkadot that theoretically work with and are of the community are in fact competitors. This has boiled over into some very public crypto Twitter spats in the last month, and seems likely to be a growing point of conversation rather than something which can now be swept under the rug.

What to watch for:

Analyst and investor Arjun Balaji called the community fracture Ethereum is now experiencing part of the public blockchain hero’s journey. In other words, it is an inevitable part of growing to the next stage. I tend to agree. It was inevitable that Ethereum would have to compete for developer attention as new solutions come to market — especially in a context with financial stakes as high as those of cryptoassets. The question I’m most interested in is how resilient the edges of the Ethereum developer community are. Do they double down or do they act on a protocol agnosticism to simply find the best solutions for building what they want to build?

3. Who Cares About Governance?

As protocols mature, the implications of their decisions take on increasingly higher stakes. It is no wonder then that governance has emerged as one of the dominant narratives of 2019.

At core is a question of whether protocols should be adopting some form of on-chain, formalized (or at least hybrid governance), versus the semi-formal, social accountability, and governance-by-exit based systems that have animated Bitcoin and Ethereum to date. Like the emergent competition around Ethereum, this narrative is also driven by new market entrants offering on-chain alternatives and forcing existing communities to ask whether something like those systems would give them a better chance to shape the direction of the protocol.

Interestingly, Governance (in particular on-chain governance) has a counter-narrative, which is abysmal voter turn out in the systems where it is currently enacted. Even in high stakes decisions like the recent decision to hike the MakerDAO stability fee significantly, less than 1% of Maker holding addresses actually participated in the vote. Similar results were seen with a recent Aragon Project vote around proposals to deploy approximately $6m to foster protocol development. Just 0.3% of holders (60 out of >20k addresses), representing 9.3% of circulating ANT voted.

What to watch for:

There are many reasons that voter turn out might be low in a governance system. The UX for voting is in most of these protocols doesn’t make it clean and easy. What’s more, votes are often on highly technical issues that involve significant background knowledge to make an informed decision.

At the same time, it may be that the simple fact of protocols is that they are destined to be a form of crypto plutocracy, with only those with the highest stake caring enough about the outcome of decisions to drive the decision-making. In Tezos, where users who stake delegate their vote to one of a much smaller number of bakers, a first exploration vote hit 82.44% of all stake voting.

Interestingly, Coinbase recently announced that they would be supporting Tezos staking and MakerDao governance natively through their Custody product. A key question around governance will be to see whether improvements in the experience of voting like this actually expand the audience who participates. Yet another will be to see how sentiment evolves around systems that use a form of delegated voting. Are they just plutocratic re-do’s of our current centralized systems, or will some find the right balance of decentralization and efficiency?

4. Fair Launches vs. Dev Incentives

One of the most hyped moments of Q1 was the launch of Grin’s implementation of the MimbleWimble protocol. There were many reasons for the excitement, including an interest in privacy coins, a feeling of the mythos of crypto with pseudoanonymous teams, and of course, a healthy dose of Harry Potter lore.

Undeniably, however, the estimates tens of millions in VC-backed mining interest was more about the promise of a “fair launch.” Unlike other tokens, there were no pre-mines and no private sales to investors before mainnet went live and became available for mining. Put differently, if you were a VC, no one else in the market could get a better “price” than you if you were first to mine. For the founding team, it wasn’t just about bringing in money interest, but about simply the right way to build a global open blockchain protocol and cryptocurrency.

A few weeks after launch, pseudo anonymous project founder Ignotus Peverell took frustratingly to the communities boards to decry how things were evolving. Specifically, he lamented that while big business interests were churning through millions on mining, one of the projects lead devs Yeastplume couldn’t get $50,000 through a crowdfunding campaign to support working on the project full time for the next 6 months.

The ensuing debate reignited a conversation about developer incentives that has been consistent background noise around crypto protocols. On the one hand, people want a purity of the economic model that doesn’t treat developers preferentially. On the other, they want the protocol to work perfectly.

Questions around dev incentives with open source software development have been around since the beginning of OSS. The stakes are raised and the questions are much bigger, however, when the software being developed is the basis for a digital money.

What to watch for:

The patina of the fair launch narrative has come off a bit after Grin. In that, it has opened narrative space for projects to argue more vociferously and with more justification for some sort of model that aligns incentives between developers and the rest of the market network surrounding a protocol, such as Zcash’s founders reward. As new protocols come online, it will be interesting to watch to see if there become new norms of what is acceptable for developer teams to ask in exchange for building an maintaining open protocols.

5. Fund Consolidation and the Blurring of Public and Private Markets

ICOs weren’t the only thing that popped in 2017. Literally hundreds of new hedge funds arose, all focused on digital assets. Even in the height of the mania, many recognized that the massive market fragmentation was unlikely to persist. As 2018’s bear market dragged on, one of the behind-the-scenes narratives was fund withdrawals as lockup periods ended and investors could take their money out.

Today, the fund narrative isn’t around withdrawals but an emergent trends towards collaboration and consolidation as top allocators build their roster of talent and skillsets to engage with a market that doesn’t easily fit into traditional categories. By way of example, Arrington Capital recently acquired an Australian fund ByteSize that brings with it a suite of proprietary data software to help inform more active investing strategies. Morgan Creek Digital — itself the product of Morgan Creek’s acquisition of Full Tilt Capital — announced it would be the lead investor in Ikigai Asset Management — a combined equity and active management fund from former point72 manager Travis Kling.

Part of the context for this trend is a growing recognition of how crypto blurs public and private market strategies. Funds are feeling the pinch of the limits of traditional boundaries and looking at new ways to combine investing disciplines. There couldn’t be a better example of this than Andreessen Horowitz recent decision that all staffers would become registered financial advisors.

What to watch for:

This feels like an inevitable mega trend. In a space that has includes a full spectrum of assets from public base layer protocol tokens to private equity sales to passive income generating assets through staking, sticking too firmly to anyone strategy could become a liability (or at least seen as so…which in the context of continually fundraising cycles is as good as being a liability). Keep an eye out for allocators not only diversifying strategies but joining forces in unexpected ways to do so.

Nathaniel Whittemore

Written by

Strategy & comms for crypto projects & funds. Expansive thinking welcome.

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